Report: Dilemma for mutual-fund investors

CBS.MarketWatch.com

NEW YORK (AP) - The stock market's split personality presents mutual-fund investors with a tricky dilemma.

"Investors are clearly
chasing performance, and the way the market has been going, technology is the only area
they think is worth chasing."
Steven Norwitz, T. Rowe Price

Those who embraced mutual funds for their promise of well-rounded, diversified assets now face a market driven almost entirely by a single sector - the booming technology group. As a result, financial professionals are seeing a steady trickle of money out of wide-ranging funds and into technology and Internet funds that offer the promise of rapid growth but carry greater risk. "Blue-chips are perceived as being as old-fashioned as needlepoint," said Brian S. Mattes, a principal at mutual fund powerhouse Vanguard Group in Valley Forge, Pa. "The only funds that are attracting attention are tech funds, or those that offer supercharged growth." The trend isn't new, analysts said, but it has accelerated in recent weeks as technology companies drove the Nasdaq composite index to record levels while the blue-chip Dow industrial average foundered. Last Friday, the Dow
INDU, +0.36%
closed below 10,000 for the first time since April 6, 1999. The Dow roared higher on Monday, while the Nasdaq
compq
dipped modestly, but analysts said a single day of blue-chip bargain-hunting was unlikely to reverse the fortunes of the divergent market. Jeffrey Applegate, chief investment strategist at Lehman Brothers, said in a report Monday that he expects growth stocks to outperform value stocks for the seventh straight year in 2000.

That undoubtedly means that mutual funds that aim for strong growth will continue to attract waves of money at the expense of more conservative investment vehicles, analysts said. Health care and biotechnology funds are also hot, fund company executives said, but technology remains the top draw. "Investors are clearly chasing performance, and the way the market has been going, technology is the only area they think is worth chasing," said Steven Norwitz, a vice president at mutual fund company T. Rowe Price
TROW, +0.04%
The numbers bear him out. In the week ended Wednesday, Feb. 23, investors poured $1.6 billion into technology stock funds, $1.2 billion into biotechnology funds and $1 billion into aggressive growth stock funds, according to AMG Data Services in Arcata, Calif. But at the same time, investors withdrew more money from Standard & Poor's 500 index funds than they put in. Index funds, which are designed to mirror the performance of a stock market index, have been among investors' favorites over the course of the bull market, now heading into its 10th year. For years, index funds provided an easy way for investors to match the broad market's returns. But last year, as dozens of aggressive growth funds posted returns of 100 percent or more, the double-digit returns available from most index funds suddenly appeared sluggish. More conservative vehicles, like money market and balanced funds, are also on the wane, analysts said. Executives at several mutual fund companies say the newest technology funds are attracting investors' money - even without proven performance records. Strong Funds Inc., based in Milwaukee, launched two new funds at the start of the year, hoping to meet demand for technology investing, said Dana Russart, director of retail operations. To date, the Strong Internet Fund (SNETX) has taken in $66 million, while the Technology 100 Fund (STEKX) has swelled to $128 million in assets, Russart said. While mutual fund companies are thriving on the waves of new money, investment professionals are concerned that investors are putting their portfolios at risk by focusing on the volatile technology sector. "Investors are anxious to believe that they have their money in the sectors that are performing well, but there's a real danger in putting all your marbles in one basket," said Geoff Bobroff, an East Greenwich, R.I.-based mutual fund consultant. Fund experts also point out that investing in one sector or group of companies destroys the diversification that leads many investors to favor mutual funds over individual stock investing in the first place. "Trends can turn around very quickly," said Norwitz. He pointed out that international funds and small-cap funds, which fell out of favor in 1997 and 1998, are rebounding strongly this year. Professionals also caution that investors who are now chasing the stellar performance of technology stocks could be in for a harsh disappointment if the technology-dominated Nasdaq tumbles. "I would remind investors that any fund that's capable of generating returns of 80 percent can generate a loss of 80 percent as well," said Mattes.

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